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Why Do Banks in Developing Countries Hold Government Securities?

Author

Listed:
  • S.M. Ali Abbas
  • Raphael Espinoza

    (UCL School of Slavonic and East European Studies)

Abstract

This paper identifies the determinants of commercial banks' holdings of government paper, using a new cross-sectional dataset on government and private returns for 594 banks from 70 emerging and low-income countries for the year 2005. The paper finds that demand for government securities responds intuitively and sizeably to variations in the mean and variance of government and private returns. Regulatory factors also matter: higher cash reserve requirements tilt banks' portfolios away from government securities and toward riskier private lending while higher capital adequacy requirements work the other way. The association between actual portfolios and the identified determinants is noticeably weaker at low levels of government bond holdings.

Suggested Citation

  • S.M. Ali Abbas & Raphael Espinoza, 2016. "Why Do Banks in Developing Countries Hold Government Securities?," UCL SSEES Economics and Business working paper series 2016-1, UCL School of Slavonic and East European Studies (SSEES).
    • Handle: RePEc:see:wpaper:2016:1
    as

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    Cited by:

    1. José Carlos Teixeira & Carlos Vieira & Paulo Ferreira, 2021. "The Effects of Government Bonds on Liquidity Risk and Bank Profitability in Cape Verde," IJFS, MDPI, vol. 9(1), pages 1-23, January.

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    More about this item

    Keywords

    Government bonds; government securities; mean-variance; CAPM; banks' portfolio choice; regulatory constraints; crowding-out;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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